Woolworths upgrades guidance

Woolworths (ASX: WOW) has this morning released a market update outlining higher losses but good progress in the home improvement division, finalisation of the Dick Smith sale, a buyback of US issued bonds, the outsourcing of its Victorian transport fleet and, importantly for shareholders, an upgrade to earnings guidance. The company announcement stated that the home improvement strategy, which began in 2010, was on track for the business to be built over five years and to deliver returns in the following years. Sales from the division are up nearly 50% on the prior year with 15 Masters’ stores having…

Woolworths (ASX: WOW)has this morning released a market update outlining higher losses but good progress in the home improvement division, finalisation of the Dick Smith sale, a buyback of US issued bonds, the outsourcing of its Victorian transport fleet and, importantly for shareholders, an upgrade to earnings guidance.

The company announcement stated that the home improvement strategy, which began in 2010, was on track for the business to be built over five years and to deliver returns in the following years. Sales from the division are up nearly 50% on the prior year with 15 Masters’ stores having now been open for over 12 months.

The good news that the strategy remains on track was countered by news that actual losses were greater than anticipated. Previously losses before interest and tax were forecast to be $81 million however they have blown out to $139 million. This was partly caused by lower profits at Danks, but primarily by larger losses at Masters.

Management’s positive outlook for home improvement and joint venture partner Lowes’ renewed support will no doubt be of interest to competitors Bunnings, owned by Wesfarmers (ASX: WES) and Mitre 10, owned by Metcash(ASX: MTS), as Woolworths presses ahead to open 90 Masters stores by 2016.

Other news contained within the update included that Anchorage Capital Partners (which previously purchased the Dick Smith retail chain from Woolworths) will pay a further $74 million in return for a release from obligations to share any upside from a future sale of Dick Smith with Woolworths. Management has used this ‘windfall’ to opportunistically repurchase debt, which would appear to be a good use of shareholder funds. A US bond buyback was also announced and is expected to save the company $109 million in future interest payments.

Finally, bringing its Victorian operations into line with other states, Woolworths has entered into an arrangement with transport firm Linfox for the outsourcing of its transport fleet. While the company announced this would lead to a redundancy charge, it didn’t provide any guidance as to the expected long-term savings from this initiative.

Foolish takeaway

While there will be certain ‘one-off’ costs associated with some of the announcements above, excluding those ‘one-offs’ management is now forecasting earnings growth of 5% to 6%, which is at the top of the previously provided guidance range.

That a company as large as Woolworths can continue to grow at a rate faster than the economy is great, however investors should also question what value should be placed on mid-single digit growth.

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